Journal of Purchasing & Supply Management 18 (2012) 113–121

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Journal of Purchasing & Supply Management

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The interplay of governance mechanisms in complex procurement projects

Marjolein C.J. Caniëls a,1, Cees J. Gelderman a,n, Nicole P. Vermeulen b,2
a
Open University of the Netherlands (OUNL), Faculty of Management Sciences, P.O. Box 2960, 6401 DL Heerlen, The Netherlands
b
Open University of the Netherlands (OUNL), Faculty of Management Sciences, c/o Rue du 31-Décembre 26, 1207 Gene ve, Switzerland

a r t i c l e i n f o abstract

Available online 2 June 2012 Although many studies have investigated governance in inter-firm relationships, little is known about
Keywords: the simultaneous use of several governance mechanisms in complex procurement projects and their
Governance mechanisms impact on project outcomes. In a case study about a complex procurement project in the Norwegian oil
Contract theory and gas industry, we investigate the interplay of contractual incentives, authority and relational
Complex procurements governance. The project faced many problems with cost overruns and schedule delays. The study
Buyer–supplier relationships clearly illustrates the interrelationships between governance mechanisms and their effect on project
Authority outcomes. The findings suggest that relational governance (trust) is only beneficial for project outcomes
Trust when it is accompanied by contractual incentives and control systems (authority). Relational govern-
Contractual incentives
ance in itself does not guarantee an effective and beneficial interplay of all three mechanisms in a way
that positive project outcomes are generated.
& 2012 Elsevier Ltd. All rights reserved.

1. Introduction
Complex procurement projects are characterized by a high
degree of uncertainty and technological complexity, the involve-
ment of a large number of actors, and a time span of several years
(Olsen et al., 2005). The complexity usually prevents the buyer
from simply buying discrete components and combining these.
Therefore, the buying process does not follow the serial and
sequential transaction mode of traditional procurement (Caldwell
et al., 2009). Hence, it is a managerial challenge to design contracts
and employ governance mechanisms that can cope with the pitfalls
associated with uncertainty, transaction costs and opportunism
that are typically involved in these complex procurement projects
(cf. Williamson, 1985, 1991).
Governance mechanisms are safeguards against opportunism
that firms employ to govern inter-organizational exchange (Jap
and Ganesan, 2000). Companies use formal governance mechanisms
such as market contracts and authority (Yu et al., 2006), as well as
relational governance mechanisms such as relational norms and
trust (Zaheer and Venkatraman, 1995). In managerial practice these
mechanisms are often applied in combination. However, in aca-
demic literature there exist opposing views on whether or not
governance mechanisms act as substitutes (e.g., Reve, 1990; Wuyts
and Geyskens, 2005; Williamson, 1985) or whether they are
n
Corresponding author. Tel.: þ31 45 5762590; fax: þ31 45 5762103.
E-mail addresses: Marjolein.Caniels@ou.nl (M.C.J. Caniëls),
Kees.Gelderman@ou.nl (C.J. Gelderman),
nicolevermeulen@hotmail.com (N.P. Vermeulen).
1 out longitudinal studies, adaptations in the mix of governance
Tel.: þ31 45 5762724; fax: þ31 45 5762103.
2
Tel.: þ41 77 4622963.
complementary (e.g., Poppo and Zenger, 2002; Ness and Haugland,
2005). Even though many studies have investigated the operation of
isolated governance mechanisms (e.g. Gassenheimer et al., 1996;
Hawkins et al., 2008; Jap and Anderson, 2003; Joshi and Stump,
1996; Poppo and Zenger, 2002; Wathne and Heide, 2000), only few
studies investigate the simultaneous use of several governance
mechanisms (exceptions are Caniëls and Gelderman, 2010; Olsen
et al., 2005; Liu et al., 2009).
This paper contributes to current understanding of governance
mechanisms in different ways. First, we investigate the simulta-
neous use of contractual incentives, authority and relational
governance. Hence, we specifically focus on the interplay of
governance mechanisms, something that has not been addressed
very often in academic studies. Second, the paper takes a dynamic
perspective on the development of governance mechanisms in
inter-firm relationships, by studying the changes in the interplay
of different mechanisms over time.Inter-firm relationships are
intrinsically unstable, because the costs and the benefits of the
relationship may change for each party after a while. In the
beginning, benefits of the cooperation outweigh the costs. How-
ever, as the cooperation continues circumstances might cause
costs to overshadow the benefits for one of the parties, while the
other party may still gain from the relationship. This situation
may induce opportunistic behavior of one party. Several govern-
ance mechanisms can safeguard against this opportunistic beha-
vior. However, the accents on each of the isolated mechanisms in
the constellation of all mechanisms may have to shift over time as
well, in order to attend to the changing circumstances and
changing behavior of business parties. Since it is hard to carry
mechanisms over time are hardly ever investigated. Yet, they are

1478-4092/$ - see front matter & 2012 Elsevier Ltd. All rights reserved.
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114 M.C.J. Caniëls et al. / Journal of Purchasing & Supply Management 18 (2012) 113–121
part of daily business practice and as such a relevant and
interesting area of research that can offer important managerial
insights. Third, the study links the co-evolvement of governance
mechanisms to project outcomes, assessed in terms of cost, timely
delivery and achieved quality. The specific focus on project out-
comes is original, because most studies in this field focus on the
use or working of governance mechanisms in buyer–supplier
relationships, but not so much on the impact of these mechan-
isms in a project management context.
In order to explore the interplay of governance mechanisms a
case study has been conducted on a complex procurement project
in the Norwegian offshore oil and gas industry. Companies in the
oil and gas industry generally spend around 80% to 90% of their
costs on contractors (Raymond and Leffler, 2006). Procurement
projects in this sector are generally complex, inducing companies
to explore the simultaneous use of contracts and other governance
mechanisms (Olsen et al., 2005). The case study involved semi-
structured interviews with key respondents, which were employed
by an initial operator, a second operator and an integrator.
Furthermore, this study draws on the available documentation
and archival records such as contracts and project monthly reports.
This article is organized as follows. First, we present the
theoretical background of the study, resulting in a conceptual
model. Then, we discuss the research methodology, followed by a
presentation of the results of the case study. Subsequently, we
discuss the results by analyzing our empirical observations and
comparing them to what is known from previous studies. The
final section presents conclusions and recommendations for
further research.
2. Theoretical background
2.1. Governance mechanisms
Building or rebuilding an offshore oil platform is a typical
example of a complex procurement project, involving several
contractors and subcontractors for a number of years (Olsen
et al., 2005), and requiring extensive coordination between parties.
Complex procurements are often associated with uncertainty and
(technological) complexity. The financial risks are likely to be
enormous. The complexity of such projects makes it very hard to
plan and achieve project outcomes in terms of time, costs and
functioning according to specifications. Furthermore, since compa-
nies are in a constant struggle to achieve competitive advantage
and financial performance, there is potential for opportunistic
behavior (Hawkins et al., 2008). Williamson (1975, p. 6) defined
opportunism as ‘‘self interest seeking with guile’’. Opportunism
includes the incomplete or distorted disclosure of information. It
refers to calculated efforts to mislead, distort, disguise or otherwise
confuse the other party (Williamson, 1985). Many studies have
demonstrated the destructive and devastating impact of opportu-
nism on the performance of a strategic alliance (Parkhe, 1993),
satisfaction (Gassenheimer et al., 1996), trust (Morgan and Hunt,
1994), and its potential to generate conflict (Joshi and Stump,
1996). Hence, opportunistic behavior can be expected to have
a detrimental impact on cooperation in complex procurement
projects.
Companies can utilize a variety of governance mechanisms in
order to cope with exchange hazards and to reduce or prevent
opportunism. Governance mechanisms are safeguards that firms
employ to govern inter-organizational exchange, minimize expo-
sure to opportunism and protect transaction specific investments
(Jap and Ganesan, 2002). These mechanisms are used in several
interorganizational exchanges, also in procurement. In this study
we seek to expand the knowledge of the isolated and combined
impact of the following governance mechanisms (cf. Wang et al.,
2008; Olsen et al., 2005):
1. Price agreements and incentives anchored in contracts;
2. Hierarchical mechanisms, based on control and authority;
3. Relational governance mechanisms, based on trust.
Contractual agreements are tied to the functioning of the
market mechanism in which behavior is induced by economic
rationales and prices. Contracts ensure relationship governance
by imposing explicit, legally enforceable contractual terms (cf.
Williamson, 1991).
Hierarchical control is primarily used to governance relation-
ships with a strong hierarchical structure, and is generally labeled
as authority (e.g. Olsen et al., 2005). Authority implies the reliance
on governance mechanisms such as rules and procedures, and it
involves exercising control and power strategies (Haugland and
Reve, 1994; Ness and Haugland, 2005). Authority is applied by the
party who has the (legitimate) right to make decisions. This party
is then using its power to control the activities of the other party
(Wang et al., 2008).
In contrast to contracts and authority that can be classified as
formal governance mechanisms, trust is a typical example of
relational governance (cf. Yu et al., 2006). Relational governance
assumes a shared set of norms and values between exchange
partners (Wang et al., 2008). Important relational norms are
flexibility, solidarity, and information exchange (Heide and John,
1992), and mutuality, role integrity, and harmonization of rela-
tions conflict (Ness and Haugland, 2005). These relational norms
can provide an important safeguard against opportunistic beha-
vior (Caniëls and Gelderman, 2010; Macneil, 1980; Dwyer et al.,
1987). Relational governance (trust) implies that transactions are
monitored while relying on social norms and personal relation-
ships (Haugland and Reve, 1994). It refers to the willingness
to rely on exchange partners in whom one has confidence
(Moorman et al., 1992). Sako (1992) emphasized that trust refers
to an expectation that a trading partner behaves in a predictable
and acceptable manner. Basically, the most important aspect of
trust is a positive belief, an affective sentiment about an exchange
partner. One has confidence in the partner’s reliability and
integrity (Morgan and Hunt, 1994). It is widely acknowledged
that trust is of key importance in projects that involve multiple
project partners (e.g., Maurer, 2010).
The literature on governance mechanisms distinguishes many
other potential safeguards such as reducing information asym-
metry (monitoring), promoting goal convergence and values
(socialization), and to excluding less reliable partners (selection)
(e.g. Wathne and Heide, 2000). We adopt the classification into
contracts, authority, and relational governance (trust), because it
covers a broad area of measures that can be employed when
dealing with opportunistic behaviors. Moreover, each of the three
mechanisms operates in a different way, therefore it may have a
unique impact on performance outcomes (cf. Jap and Anderson,
2003). The theoretical underpinning of this classification lies in
contract theory, which considers contracts as a structural dimen-
sion in relationships (Ness and Haugland, 2005).
2.2. Interplay of governance mechanisms
The current literature on governance mechanisms has not yet
reached consensus on whether governance mechanisms substi-
tute, or rather complement each other. Various studies have
emphasized the complementary characteristics of using different
governance mechanisms (e.g., Das and Teng, 1998; Larson, 1992;
Poppo and Zenger, 2002; Zucker, 1986; Klein Woolthuis et al.,
2005; North, 1990; Hoetker and Mellewigt, 2008; Bradach and
 M.C.J. Caniëls et al. / Journal of Purchasing & Supply Management 18 (2012) 113–121
Eccles,1989). Haugland and Reve (1994) found that governance
by contractual agreements, authority and trust can be used in
different combinations for safeguarding against opportunism. One
important reason for arguing that different governance mechan-
isms should be combined, is the presence of a large number of
governance challenges in most inter-firm relationships, and the
application of only one mechanism is therefore not sufficient
(Bradach and Eccles, 1989). Contractual governance mechanisms
and relational governance mechanisms serve different goals and
have different functionalities, and could therefore be complemen-
tary in their roles in facilitating exchange performance (Das and
Teng, 1998; Ferguson et al., 2005; Haugland and Reve, 1994). A
well-tailored contract might stimulate collaborative behaviors
and create a restraint on opportunism. Furthermore, relational
governance and trust might be useful in overcoming the adaptive
limits of contracts (Poppo and Zenger, 2002). Stinchcombe (1985)
documents how price incentives (contracts) and authority can be
combined, arguing that control mechanisms have to be explicitly
addressed in contracts.
An alternative view argues that relational norms and trust are
substitutes for contracts and authority (Granovetter, 1985). Especially
in collaborative relationships drawing up formal contracts may be
interpreted as an act of distrust in the exchange partner. Apparently
the exchange partner is not willing to risk cooperation without
having a contract that explicitly states the terms of interaction. In
such a situation a formal contract might encourage (rather than
discourage) opportunistic behavior (Ghoshal and Moran, 1996). In
this line of reasoning, a contract is considered to have a counter-
productive impact in the presence of relational governance.
Although, there is a reasonable body of evidence to support an
integrative view of contractual and relational governance as
complementary mechanisms (e.g., Das and Teng, 1998), there is
still little understanding about the specific ways in which govern-
ance mechanisms interact, and the impact of their inter-relation-
ship (Poppo and Zenger, 2002; Zheng et al., 2008; Caniëls and
Gelderman, 2010). Exceptions are the studies of Olsen et al. (2005),
Caniëls and Gelderman (2010), and Liu et al. (2009). Based on two
case studies concerning system delivery projects, Olsen et al.
(2005) reported that contacts, authority and trust are complemen-
tary. Moreover, they found a complex interplay between the
specific use of the different mechanisms, which was denoted as a
‘multiplier effect’. It was concluded that using one mechanism
supports the use of other mechanisms. However, Olsen et al.
(2005) have no explicit focus on preventing and remedying
opportunistic behavior. Furthermore, they explicitly call for more
empirical work to further validate the idea of complementarity.
Caniëls and Gelderman (2010) and Liu et al. (2009) adopted a
survey approach when studying the simultaneous use of several
safeguards against opportunism. Both studies find interaction
effects between different safeguards. However, these studies adopt
a slightly different categorization of safeguards than is proposed in
the underlying study. Furthermore, by using cross-sectional data,
these studies cannot investigate the dynamics of the interplay.
We conclude that there is ample room for additional empirical
studies that investigate the interplay of governance mechanisms
as a way to safeguard against opportunism. In addition, there is
opportunity for research that takes a dynamic perspective. Except
for the longitudinal case study of Ness and Haugland (2005), little
research has been undertaken on relationship development and
the change over time in the reliance on certain (combinations of)
governance mechanisms.
2.3. Project outcomes and research model
In our study we explicitly focus on the influence of governance
mechanisms in project management. A common way to measure
115
Incentives/contract
Project outcomes:
- cost
Trust - time
- quality
Authority
Fig. 1. Research model.
project success is by determining whether the project stayed
within budget, delivered on time, and delivered conform specifi-
cations (Munns and Bjeirmi, 1996). That is, the project has to
perform within the cost, time, and quality constraints as identi-
fied by the Iron Triangle of project management (Oisen, 1971; De
Wit, 1988). The triangle illustrates the notion that the different
constraints are interconnected. For example, not adhering to time
schedules can lead to high costs and therefore to overruns of the
project budget.
Fig. 1 presents the conceptual research model that is adopted
in this study. The model connects the three governance mechan-
isms directly to the project outcomes. In general, we expect
positive relationships between each governance mechanisms
and the identified project outcomes. In addition, the model shows
the interrelationships between the three governance mechan-
isms. The isolated mechanisms are mutually dependent, and their
simultaneous application affects the project outcomes. It is
expected that the interplay between each governance mechanism
has an effect on the other mechanisms, as well as on the project
process and outcome. The empirical part of the study elaborates
on the interplay of mechanisms.
3. Methodology
We conducted a case study in the Norwegian offshore oil and
gas industry. A case study approach is best suited for an
explorative study that contains the in-depth investigation of the
specific interactions between the governance mechanisms and its
impact on the project outcomes (Yin, 2009). In order to enhance
the validity and reliability of our study, we followed the phases
for conducting case study research as described by Noor (2008).
The selected case consists of a complex procurement project for a
very innovative construction pilot project. The selection of the case
was based on the consideration that we explicitly wanted to
investigate a complex procurement project that involved multiple
actors. The complexity of the chosen project stemmed from its high
technological difficulty, the vast number of actors involved, the high
budgetary implications, the long lead time and the high level of
uncertainty at the start of the project with regards to the expected
outcomes and precise technical specifications.
Different sources of evidence are used to complement each
other and to ensure the validity of the study (Yin, 2009). The case
study involved in-depth semi-structured interviews with key
respondents, as well as an analysis of documentation and archival
records, including contracts, project kick-off documents, project
strategy reports, and monthly progress reports.
The case study was performed in retrospect. Due to the long
duration of the project (6 years), the analysis of supporting
evidence such as the project documents and other archival
records were critical in order to validate interview outcomes.
Another reason why triangulation was important for enhancing
116 M.C.J. Caniëls et al. / Journal of Purchasing & Supply Management 18 (2012) 113–121
the validity of the study is that some informants might have
difficulties recalling certain events, leading to response bias. In a
complex project like the one in this study it is difficult and nearly
impossible to find one person with a complete overview of the
project.
We conducted interviews within the organizations of the
internal operator, a second operator and the integrator. An inter-
view typically lasted 60–90 min. All interviews were recorded and
transcribed. We have interviewed employees of different levels
within the organizations to collect a great variety of information.
The respondents included project managers, contract managers,
technical managers and more hands-on (technical) employees
whose combined insights gave a full spectrum view on the
project, ranging from top-level management activities to more
down-to-earth day to day action on the work floor.
Memoing was used to facilitate the qualitative analysis
(Babbie, 2001). This technique includes writing memos and notes
in order to refine and keep track of ideas about the investigated
phenomena. The use of memoing enhanced data collection
and data exploration by making it easy to compare information
about key issues and facilitate communication with respondents
(Glaser, 1998). The collected data (archival as well as interview
data) was coded and classified (Ghauri and Gronhaug, 2002). The
content of each of the contracts was categorized in a table which
made it easy to compare and to have a clear overview of the key
elements of each contract. Progress reports were processed into a
timeline to understand the chronology of events. The timeline
was also very useful in showing the key problems that occurred
during the project.
For the conceptualization and the operationalization of the
variables in our interviews and in the research model we drew on
existing studies:
Contract/incentives refer to a market mode of exchange. In the
interviews we specifically paid attention to agreements on the
sharing of risks and rewards in the contracts, since these are
expected to function as key incentives that determine behavior
and therefore performance of parties in the project. We also
gathered information on the perceived clarity of the specifications
of the expected deliverables, as well as the feasibility of being able
to deliver them in time and within budget (Olsen et al., 2005).
Authority refers to the hierarchical mode of exchange, i.e.
reliance on administrative procedures and control systems. Since
authority requires power to control the activities of others,
authority is indicated by the extent to which one party has the
ability to determine terms of trade, and the extent to which
standard operating procedures for supervision are implemented
(Wang et al., 2008).
Trust refers to a social mode of exchange, and was assessed by
investigating the relational norms that govern the relationships
as well as the perceived importance of personal relationships
(Bradach and Eccles, 1989).
Project outcomes refer to the results of the project. Project
success is generally assessed by determining whether the deliver-
ables are on time, within budget, and fulfill specified quality
norms (Munns and Bjeirmi, 1996; De Wit, 1988).
The observed patterns and relationships in our case study have
been compared with the ones in the research model (pattern
matching, e.g. Eisenhardt, 1989). Since the impact of additional
factors outside of our model cannot be completely excluded, the
internal validation is limited. However, the research framework
for the case study was derived from the literature, identifying
(potential relationships between) key variables and outcomes.
Obviously, the results of a single case study do not allow for any
statistical generalization to other complex procurement projects.
Still, the findings will be related to the current body of knowledge,
allowing for some analytical generalization (Yin, 2009) and
making a contribution to our understanding of the interplay of
governance mechanisms in complex procurement projects.
4. Results
4.1. Case description
The innovative character of the project implied the need for
joint technical development of parts and processes. Therefore, it
was necessary for the parties involved in the project to engage in
long term relationships with supplying partners. Supplying par-
ties were expected to design and produce components for a major
construction project in the offshore industry. The size of the
project was initially estimated at 850 million Norwegian Krone,
and the project was allowed to last 6 years. The main character-
istics of the project are shown in Table 1.
The project was executed in a way that is typical for projects in
the oil and gas industry, namely involving an operator, an
integrator and subcontractors. In the selected case the complexity
was increased by the switch to another operator after a few years.
The second operator was already involved in the project from the
start in an observing role, and later gained full responsibility (see
Fig. 2). The executing parties remained the same throughout the
entire project.
The involvement of a large number of subcontractors was
another complexity. This generated a long supply chain with
sub-subcontractors, which did not support communication, and
generated difficulties in the alignment of tasks between the
sequential sub contractors. To increase complexity even more,
some parties held multiple roles simultaneously, for example the
integrator was also a subcontractor for some deliverables.
Operator A and the integrator had already been cooperating in
previous projects. In the beginning, the project was mainly based
on a trustful relationship between operator A and the integrator.
These parties displayed much openness in communication and
a high level of integration. The integrator and operator A were
even located in the same building. The relationship between the
integrator and the subcontractors was of another nature. The
subcontractors had many different nationalities which limited the
quality and openness of communication. There were also differ-
ences in perception of correct working procedures. During the
project the staff of the integrator had to travel much to visit the
subcontractors on site.
4.2. Project outcomes
The project outcomes with respect to the adherence to budget
and time constraints were unsatisfactory. Problems at the origin
Table 1
Case specifications.
Criteria Case specifications
Purpose Qualification of components for a major construction
project in the offshore industry
Budget Initially estimated at 850 million Norwegian Krone
Length 6 years
Contract form Reimbursable contract
Organizational Co-location with main contractor/integrator. Strongly
form integrated team at the start, but over the course of the
project the teams became more separated
Number of main 1 integrator, 5 subcontractors
partners
End result  Cost increased to 2 billion Norwegian Krone
 Delays
 Deliverable were according to technical specifications
 M.C.J. Caniëls et al. / Journal of Purchasing & Supply Management 18 (2012) 113–121
Fig. 2. Main stakeholders in project—change of responsibilities.
of the chain caused a negative effect all the way up the chain.
Since activities and planning schedules were closely linked across
parties, delays by one actor in the chain resulted in a ‘chain
reaction’ and led to difficulties for subsequent actors. Often, the
focus of sub(sub)contractors was not on timely delivery, but
rather on technology development and technical quality. The
main problems in the project that caused the cost increases and
schedule delays are discussed below.
The project had many problems with cost overruns. In the end the
project doubled the estimated costs. The client had to pay all the cost
incurred by the contractors, since the project was governed by a fully
reimbursable contract. This means that all cost that are made by
contractors will be fully compensated and paid back by the initiator
of the project. Because parties worked with open financial books, it
was clear how, when and by whom the money was spent. Several
reasons were given for the unforeseen cost increase. The first reason
is associated with the nature of the project. Projects in which new
technology is developed are difficult to oversee in terms of time,
budget and specification of deliverables. It was not clear from the
start of the project what the project would exactly entail and
therefore non-accurate estimates had been given with respect to
time, cost and quality. Even though the deliverables were described in
the technical requirements section in the contracts, several subcon-
tractors were faced with unclarities about the exact specification
concerning the deliverables. Second, the responsibilities and roles of
the different parties were unclear, and proper interface management
was missing. Consequently, there was a lack of cost control, since
adequate control systems were absent, such as procedures for cost
and time monitoring and control. Third, the contractual agreements
in the first phase of the project did not provide an incentive structure
for the parties involved that was likely to lead to desirable behavior.
Initially, the contract was fully cost reimbursable, without penalties
for non-performance or incentives for meeting specific objectives,
such as keeping activities within a certain budget or meeting a
particular time schedule. Hence, no incentives existed for the inte-
grator or for the subcontractors to stay within cost limits.
With regard to the dynamics of the project, we found that
during the run of the project certain incentives were deployed,
which led to a reduction in the number of cost overruns and their
severity. For example, midway the project bonuses were intro-
duced if certain milestones were achieved, furthermore costs
were only paid back up to a certain maximum.
Whether a project is finished within the allocated time is another
measure of project performance. In the underlying case many delays
occurred: 60–90% of the deliverables did not arrive on schedule,
causing a chain-reaction of delays in subsequent activities. The
following factors were found to cause these delays. First, the
117
technological complexity of the project led to unforeseen technical
difficulties. Subcontractors lacked technical expertise and had to
enter entire new fields of know-how for which they were insuffi-
ciently prepared. Second, partners did not allocate sufficient
resources to the project, because in the beginning phases of the
project the incentive structure did not support the envisioned
outcomes. For example, there were no penalties installed for late
deliveries. A related third reason for delays was that an adequate
time control system was absent. There was a lack of adequate
documentation. The monthly reports provided an overview of
project highlights. However, the overviews did not show who was
responsible for deviations and what the expected impact would be
on the project in terms of cost and time delays. Fourth, there was no
planning manager appointed by the integrator. A lack of focus on
planning and scheduling occurred already from the start of the
project. The operators were very involved in and concerned with the
technology development and they had a narrow focus on technical
issues, while project management aspects were neglected.
In a later phase during the project, specific incentives were
included in contracts in order to reduce the number of delays.
Penalties were given when delivery deadlines were not met. Not
meeting specified deadlines would reduce the percentage that
would be compensated by the project initiator. However, these
incentives did not entirely generate the desired results. The
envisioned end date for the project did not improve. Furthermore,
delayed deliverables stayed delayed, although no additional
slippage of time was reported. The fact that the contractual
incentives did not have the desired effects has probably to do
with the specific nature of the project. Projects that involve
research and development of new technology are highly uncer-
tain and difficult to schedule and speed up. Still, the incentives
did direct the attention of the parties involved towards the
importance of cost and time efficiency.
During the run of the project, quality requirements were put
center stage. Meeting quality requirements was perceived as the
most important aspect of the project, which caused the neglect of
budget and time constraints. Despite the usual quality problems
during a project and the associated interventions to remedy those,
the project end result achieved the envisioned quality levels.
4.3. Governance mechanisms
Operator A and the integrator had frequently cooperated in
previous projects and were highly integrated. The contract was seen
as a way to write up the intention to undertake a joint effort in order
to deliver the required technology. The contract stated among others
that all costs made by the integrator and subcontractors would be
118 M.C.J. Caniëls et al. / Journal of Purchasing & Supply Management 18 (2012) 113–121
fully reimbursed. However, the fact that the contract included no
additional rewards if the parties achieved positive outcomes and
contained very limited penalties, resulted in low motivation to keep
costs within budget and to stay within time limits. The following
statement from a respondent illustrates the problem of having a
reimbursable contract without incentives: ‘‘The contract we had
between the operator and the integrator was a suicide contract. All
costs charged by the integrator were immediately paid without
questions asked’’.
The lack of incentives for the contractors made that the
contractors occasionally prioritized other projects when allocat-
ing their resources. When resources were needed in another
project which provided higher incentives, subcontractors shifted
resources to that particular project, while leaving this project
with a shortage of resources. This obviously had a negative impact
on the progress of the project. Again the absence of clear rewards
and penalties in the contract was mentioned by respondents as
one of the problems leading to a lack of project outcomes.
The initial high level of trust between operator A and the
integrator may have been one of the reasons that an inadequate
incentive scheme was implemented in the first place, and that
parties completely relied on common goals and objectives. The
respondents indicated that the high level of trust and the
presence of common interests made it acceptable not to have
rewards and penalties in the contract.
With respect to mechanisms of hierarchical governance we
find that a steering committee was installed already from the
start of the project. However, its existence was barely noticed by
the project members. The high level of integration between the
integrator and operator A induced a high reliance on relational
norms and trust within the relationship. As a consequence, parties
did not use hierarchical mechanisms to enforce control. Formal
procedures were not installed and the neither party used their
power position to enforce agreements or expectations.
The use of authority as a way to govern the relationships was
also hindered by the incompleteness of the contract. Since the
contract between operators mainly consisted of a two page
cooperation agreement and did not encompass clear responsibil-
ities and expectations of deliverables, parties were unable to refer
to contractual agreements about costs and time schedules. Respon-
dents representing operator B claim that they were unable to use
any authority since there were no adequate procedures or control
systems identified in the contract that allowed them to do so.
Over time, as the project progressed, this way of working
resulted in a decrease of trust between operator A and the
integrator. During the course of the project, subcontractors
started to behave opportunistically and misused the budgetary
freedom provided by the contract. Operator A was unable to meet
deadlines, because of the bad performance of its subcontractors.
After a while operator A noticed the opportunistic attitude and
behavior of the subcontractors and started to mistrust them. Also
the confidence and trust between operator A and the integrator
subsided. All this time, employees from operator B felt powerless.
They saw that there was no control on what was going on in the
project. Respondents representing operator B indicated that they
were very concerned about whether the project goals would be
achieved within a reasonable time frame and within budget.
In contrast, respondents representing operator A indicated that
their decisions were questioned more and more as the project
advanced. They felt that they were continuously being checked.
The following statement of a respondent working at operator A
illustrates the spiraling negative impact on trust between parties:
‘‘We avoided giving too much information, as this would lead to
even more questions’’ and ‘‘Obviously, a 100% openness is not
possible in a commercial project like this’’. As became clear by an
interim progress report that the project progress was under par,
the contract was changed. The unlimited reimbursability was
over and operator A now had to justify each and every expendi-
ture. One of the respondents at the side of the operator said: ‘‘We
were afraid to ask for specific tasks to be executed as it would
increase the costs. Every item we asked for, would be written
down and we would have to pay for it’’. The role of operator B
became more prominent in the execution of the project up to a
point that operator B gained full responsibility.
Our case study effectively illustrates the interplay of contractual
incentives, authority and trust and the effect of the use of these
governance mechanisms on the final project outcomes. Governance
mechanisms of contractual incentives, authority and relational
norms (trust) affected each other to a great extent. When at the
start of the project a high level of trust existed between operator A
and the integrator, they decided that there was not much need for
contractual incentives or an adequate control system. Hence, little
to no effort was made to ensure that the contract contained
incentives, which would generate the desired behavior of parties.
Additionally, there were no systems installed to monitor each
party’s behavior in order to verify progress and outcomes. This
prevented the parties involved to be able to intervene in a timely
manner. High trust together with a lack of clear contractual
incentives and low hierarchical governance (authority) had a very
negative impact on project outcomes. The case illustrates a clear
interaction between the three governance mechanisms. Whereas at
the outset of the project trust is leading to informal agreements (no
contractual incentives) and little use of authority, later on the
absence of contractual incentives combined with a low level
of authority became the source of the decline in the level of trust
between parties.
At the time that the poor interim project outcomes were
announced, the amount of trust between parties severely decreased,
which resulted in the instalment and use of more formal governance
mechanisms, namely contractual incentives and control systems.
This particular constellation of governance mechanisms ultimately
had a positive effect on the project outcomes, since the incentives
generated awareness of parties to focus more on budgetary aspects
and the importance of adhering to time schedules.
5. Discussion
Our results complement and nuance the findings of the com-
parable study of Olsen et al. (2005) on two cases in the Norwegian
oil and gas industry. The first case of Olsen et al. (2005) was
characterized by trust at the outset, which made it possible to
implement an effective incentive scheme in the contract and to
design an authority structure conducive to timely progress within
budget and conform specifications. In the interplay between
governance mechanisms, the formal governance mechanisms
(incentives and authority) were believed to positively reinforce
trust between parties, resulting in positive project outcomes. The
second case analyzed in Olsen et al. (2005) described a project
which was characterized by a low level of trust at the start-up. This
made it difficult to implement contractual incentives and author-
ity. As a result, parties were not bound by shared goals, and this led
to opportunistic behavior and poor project outcomes. One of the
conclusions of Olsen et al. (2005) from these two cases is that that
trust might drive the interactions among governance mechanisms,
and therefore might be key to explaining project outcomes. Trust
seems to facilitate the implementation of the other mechanisms.
High trust at the outset is beneficial for project outcomes, the
absence of trust is associated with bad project results.
This finding is supported by other contributions. For example,
in a study about safeguards against opportunism Caniëls and
Gelderman (2010) found that trust (relational norms) is the most
 M.C.J. Caniëls et al. / Journal of Purchasing & Supply Management 18 (2012) 113–121
influential safeguard against opportunistic behavior of exchange
partners. In addition, this study found that trust plays a key role
on implementing other governance mechanisms. Thus, trust
affects the application of other safeguards. In the field of project
management, Pinto et al. (2009) showed that trust is an important
factor to enhance the project outcomes and reduce opportunism
in projects. Hence, the general view from the literature seems to
be that trust drives other governance mechanisms.
The findings from our case show the need to nuance and refine
these conclusions. Our case indicates that trust based on shared a
common history and positive past experiences do not automati-
cally drive other governance mechanisms towards an interplay
that results in positive project outcomes. We found that trust in
absence of contractual incentives and control (authority) leads to
bad project outcomes. Hence, the role of trust is less straightfor-
ward than would be expected from the literature in general, and
Olsen et al. (2005) in particular.
The high level of trust between operator A and the integrator
can be identified as competence trust, i.e., the belief in the ability
of an exchange partner to perform tasks according to agreements
(Nooteboom, 1996), as opposed to benevolent trust in which
partners are truly interested in the other’s welfare (Anderson and
Narus, 1990). The latter form of trust can be associated to
common goal setting and shared intentions. Partners watch each
other’s back and really put in effort to jointly reach a commonly
shared goal. When one party makes an honest mistake, it is
forgiven by the other party. Although in our case at the start of
the project parties might indeed have had benevolent trust in
each other as they seemed to be focused on shared goals, this
slowly changed over time. At first some level of competence trust
remained, which might have been the reason that the project
could carry on for quite some time before the bad results became
visible. However, over time the competence trust disappeared as
well, especially when it became clear by the interim evaluation
that the project results were below par.
Moreover, little team building activities had been taking place
between both operators and the integrator during the project.
Trust is believed to serve an important role in the beginning of a
project to enhance a common focus on joint goals, however, during
the run of the project it is important to keep communication lines
open and to continue to invest in maintaining a close relationship.
The socialization literature suggests that socializing is needed to
build inter-personal relationships and trust (e.g. Cousins et al.,
2008). Socializing forges bonds and ties that facilitate the exchange
of communication and information (Cousins and Menguc, 2006)
and has a positive impact on business performance (Cousins et al.,
2008). Lawson et al. (2009) found that informal socialization
mechanisms are the most important means of facilitating the
sharing of knowledge. The lack of social events, joint workshops,
and team building exercises could explain why the communication
between operator A and the integrator failed, why the problems
were not properly handled, and why trust dwindled.
The case nicely shows that at the time that trust levels became
quite low, the parties resorted to more formal governance mechan-
isms. These findings are in line with the duality perspective of
Möllering (2005), in which is claimed that trust and control are
always present simultaneously and cannot be analyzed in isolation.
In this respect, Caniëls and Gelderman (2010) found that high
administrative control (contracts) was significantly and negatively
associated with relational governance (trust). However, the study
of Caniëls and Gelderman (2010) relied on multiple regression
analysis, hence causality could not be established. Thus, all we can
conclude from their study is the negative relationship between
trust and control. The findings of our case study seem to elaborate
on this evidence by suggesting a causal relationship from trust
towards contractual incentives and authority. At the time that trust
119
was low, the relational governance mechanism was substituted
by the more formal mechanisms of authority and contractual
incentives. However, these findings have to be interpreted with
great caution, since the cases of Olsen et al. (2005) suggested the
opposite, namely that low trust led to low formal governance.
These seemingly conflicting findings might be explained by the
interplay of governance mechanisms. It might not be the case that
trust determines whether there will be high or low formal
governance, with an associated positive or negative impact on
project results. Rather it is much more likely that the constella-
tion of the three governance mechanisms at one moment in time
has a direct effect on project outcomes. The interaction between
governance mechanisms is of paramount importance in deter-
mining project progress and outcomes in terms of time and cost
efficiency and quality.
Our case is particularly interesting because we can clearly see
the dynamics of the interaction effects between different govern-
ance mechanisms. We find that some governance mechanisms
lose importance over time, i.e. trust; while other mechanisms
become essential, i.e. contractual incentives and authority. In this
sense our case also differs from Olsen et al. (2005) in which the
change in accents on particular governance mechanisms over
time is not that prominent. Our study adds to previous studies in
this respect, by not only focusing on the interplay of government
mechanisms but also illustrating the dynamics.
Hence, our study contributes to the discussion on whether
formal and relational governance can be both substitutes and
complements (cf. Huemer et al., 2009). Our empirical findings
suggest that one should look at the mix of governance mechan-
isms at one point in time to determine chances and risks for
project progress and outcomes. In that sense governance mechan-
isms are complementary and support each other. Our case also
demonstrates that accents on different mechanisms in the mix
can change during the run of a project. The shifting accents could
be interpreted as substitution effects.
The results of this study should be interpreted in the light of
the specific mix of governance mechanisms (high trust – low
incentives – low authority) and in the light of a poor (interim)
project performance. Other mixes and other circumstances are
likely to result in other developmental patterns of governance
mechanisms, as was shown by the study of Olsen et al. (2005).
6. Conclusions and recommendations
Although many studies have investigated governance in inter-
firm relationships, little is known about the simultaneous use and
impact of several governance mechanisms, particularly in com-
plex procurement projects. In complex and hazardous projects
that require an extensive coordination between different parties,
the impact and interplay of governance mechanisms are espe-
cially important. The investigated project in the Norwegian oil
and gas industry is a typical example of such a complex procure-
ment project. Significant interplay effects were found in the
study, not just among governance mechanisms, but also between
these mechanisms and project outcomes.
With respect to the interplay of governance mechanisms and
its impact on project outcomes we find that the role of trust is less
straightforward than would be expected from the literature.
Existing studies (e.g. Olsen et al., 2005) suggest that trust drives
other governance mechanisms and ultimately leads to desirable
project outcomes. The absence of trust is generally associated
with bad collaboration between project partners, resulting in
bad project outcomes. Our study shows the need to refine this
reasoning. We found that trust in absence of contractual incen-
tives and control leads to bad project outcomes. In contrast, trust
120 M.C.J. Caniëls et al. / Journal of Purchasing & Supply Management 18 (2012) 113–121
in combination with contractual incentives and authority leads to
well defined contracts with clear roles of parties and specific
agreements on deliverables that easily can be reinforced.
The main conclusion of our study is that trust and relational
governance are only beneficial for project outcomes when they
are accompanied by contractual incentives and control systems.
Trust in itself does not guarantee an effective and beneficial
interplay of all three mechanisms in a way that automatically
generates project progress and desired outcomes. In order to
achieve project performance, all three mechanisms must work
together and support and stimulate each other. This does not
happen automatically, it might be so, as was demonstrated by our
case, that one mechanism leads to the neglect of another.
This study has several managerial implications. Management
should understand the impact of governance mechanisms on the
project outcomes, their interplay, and the varying effects during
the run of complex (procurement) projects. From a managerial
perspective it is importance to be aware that different governance
mechanisms are mutually dependent. In order to achieve optimal
project performance, proactive strategies are required on how to
employ the mix of various governance mechanisms, rather than
applying each mechanism in isolation. It is a challenge to manage
the entire mix of mechanisms simultaneously to generate a
productive rather than counter-productive interplay between
mechanisms. A way to deal with this challenge could be to have
a kick-off meeting with all stakeholders, in which governance
mechanisms are explicitly discussed (see also Liu et al., 2009).
Before the start of a project the parties involved could come to an
aligned plan about how to implement the mix of governance
mechanisms. Parties should be aware that the design and execu-
tion of an optimal mix of governance is essential to reach
common goals. Furthermore, parties should be willing to jointly
evaluate, discuss and possibly revise the mix of mechanisms on a
regular basis, to be able to adapt to changing circumstances
during the run of a project.
The classical recommendation in project management litera-
ture is to use cost reimbursable contracts when project uncer-
tainty is high (e.g. Branconi and Loch, 2004). In the complex, risky
and highly uncertain project of our case a reimbursable contract
was indeed used. However, this approach left all responsibility to
the client, while the contractors had no incentive to be cost and
time efficient. The findings of our case lead to the following
managerial advice in this respect. Because of the many uncertain-
ties about output specifications, it might still be wise to draw up
reimbursable contracts, however, it is highly advisable to ensure
that the roles of parties are clearly stated in the contract and
contractual incentives are designed in a way that they induce
desired behavior of parties. A trusting relationship in itself is not
sufficient to induce good project performance. In addition, it is
sensible to develop clever ways in which interests of project
parties become and remain aligned. This can be achieved for
instance by investing in socialization efforts, such as team build-
ing events.
Several avenues for further research are opened by our study.
A next step could be to formulate a format for a mix of
governance mechanisms with different accents that would gen-
erate optimal project outcomes in different circumstances. It
would be worthwhile to investigate whether it is possible to
provide a ‘‘recipe’’ of constellations of mechanisms to use in
various circumstances. This would be a valuable asset to man-
agers in complex procurement situations. Furthermore, research-
ers are encouraged to undertake further studies into socialization
as a potentially effective governance mechanism that precedes
and stimulates trust in buyer–supplier relationships. Additionally,
further research is recommended on the role of trust in relation to
the other governance mechanisms to provide supplementary
insights on whether trust acts as a driver for other governance
mechanisms, or whether it is really the combination of trust with
the other mechanisms that generates a successful interplay and a
positive impact on project outcomes.
One of the limitations of our study pertains to the level of
complexity of this project and its duration. Only few employees
were involved from the start of the project had could therefore
provide a complete overview of what had happened during the 6
years. Moreover, several employees had changed roles during the
run of the project. Some of the interview questions might have
been difficult to answer by respondents who were not in a project
management position, and were lacking a helicopter view. How-
ever, we feel that the analysis on basis of all the interviews
together, supplemented with the archival records, gave a com-
plete and comprehensive overview of the project.
Another limitation of our study concerns our use of a single
case that obviously limits the external validity of the results.
Therefore it is clear that our results should be interpreted with
caution. Further research is needed to extend the knowledge in
this field and to identify whether out findings can be generalized
to other complex procurement projects. To this end more cases of
complex procurement projects should be studied and compared.
Moreover, future research should investigate the impact of
specific combinations of governance mechanisms, preferably in
a dynamic context.
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